Manufacturing Is Growing Faster than the Economy

Sept. 15, 2010
Although the economy is slowing down, the manufacturing sector is still seeing growth thanks to pent-up demand

The pace of recovery in the general economy has slowed, but the deceleration is less visible in the manufacturing sector, according to a quarterly report from the Manufacturers Alliance/MAPI. By supplying major assumptions for the economy and running simulations through the IHS Global Insight Macroeconomic Model, the Alliance generates unique macroeconomic and industry forecasts.

“Despite less consumer spending growth in the second quarter, there was nevertheless some employment growth and modest wage increases. Also, the prolonged downturn and sluggish recovery have created pent-up demand for some durable goods, including sales of motor vehicles and appliances,” says Daniel J. Meckstroth, chief economist for the Manufacturers Alliance/MAPI and author of the analysis.

“In addition,” Meckstroth adds, “the inventory swing is greatest in manufacturing; exports are predominantly manufactured and benefitted from the fast global trade bounce back; and business investment in equipment rebounded much faster than consumer spending, thus making the pace of the industrial recovery stronger than that in the general economy.”

Manufacturing industrial production, measured on a quarter-to-quarter basis, grew at an 8% annual rate in the three months ending July 2010, after expanding at a 5% annual rate in the three months ending April 2010. MAPI predicts the superior growth trend for manufacturing will continue, but decelerate, increasing 6% overall in 2010 and advancing 5% in 2011. At this pace it will be late 2012 before manufacturing production exceeds the December 2007 pre-recession level.

Production in non-high-tech manufacturing expanded at an 8% annual rate during the May-July 2010 period. According to the MAPI report, non-high-tech manufacturing production is expected to increase approximately 5% in 2010 and 4% in 2011. High-tech industrial production rose at a 10% annual rate in the May-July 2010 time frame. MAPI anticipates that it will post strong 15% growth in 2010 and 13% growth in 2011.

There was an upward trend in the May-July 2010 figures for the various components of the manufacturing economy. Twenty-two of the 27 industries tracked in the report had inflation-adjusted new orders or production above the level of one year ago, three more than reported in the previous three months ending in April 2010. Iron and steel production grew by 68% in the three months ending in July 2010 compared to the previous three months, while industrial machinery production improved by 58% in the same window.

The largest drop came in private nonresidential construction, which declined 21%, while public construction and aerospace products and parts each experienced a 4% decline.

Meckstroth reports that 17 industries are in the accelerating growth (recovery) phase of the business cycle; five industries are in the decelerating growth (expansion) phase; three industries appear to be in the accelerating decline (either early recession or mid-recession) phase; and two are in the decelerating decline (late recession or very mild recession) phase of the cycle.

MAPI forecasts that 18 of the 24 industries will show gains in 2010, led by iron and steel production with expected 56% growth and industrial machinery with 36% growth. The recovery should continue in 2011 with growth likely in 22 of 24 industries, including seven industries which are predicted to grow at double-digit rates, led by housing starts at 40%—albeit from excessively low levels—and engines, turbines and power transmission equipment at 25%.